1、Profit Pools and Core CompetenceDarral G ClarkeProfessor of ManagementThe Marriott SchoolBrigham Young UniversityProfit Pools:A Fresh Look at StrategyOrit Gadiesh and James L.GilbertHarvard Business ReviewMay-June 1998THE PC INDUSTRYS PROFIT POOLnValue chain focusnAxesnVerticaloperating marginnHoriz
2、ontalshare of industry data40%30201000100%share of industry revenuemicroprocessorsother componentspersonal computerssoftwareperipheralsservicesThe value chain for the PC industry includes six key activities;the profitability of the activities varies widely.Manufacturers compete in the largest but le
3、ast-profitable segment of the chain.The Profit Pool LensnThe profit pool is the total profit earned in an industry at all points along the industrys value chainnSegment profitability may vary by customer group,product category,geographic market,or distribution channelnProfit concentration may be ver
4、y different than revenue concentrationnShape of the profit pool reflects the competitive dynamics of a business Interactions of companies and customers Competitive strategies of competitorsnProduct pools are not stagnantTHE U.S.AUTO INDUSTRYS PROFIT POOL100%operating marginsource:Harvard Business Re
5、view,May-June 1998auto rental25%1510500share of industry revenueauto manufacturingnew car dealersused car dealersauto loansauto insuranceaftermarket parts20leasingwarrantygasolineservice repairThe automotive industry encompasses many value-chain activities.The way that profits and revenues are distr
6、ibuted among these activities varies greatly.The most profitable areas of the car business are not the ones that generate the biggest revenues.Profit Pools:Company ExamplesCompaniesAutomakersU-HaulElevators(OTIS)Harley DavidsonPolaroidCore BusinessAuto manufacturingTruck RentalElevator Manufacturing
7、MotorcyclesInstant Photography CamerasSources of Highest ROIAuto leasing,insurancePacking materials,storageServiceAccessories(consumer products),leasing,service,restaurantsFilmManagerial ImplicationsnFocus on growth and market share can lead a company to focus on unprofitable segments of an industry
8、nTodays deep revenue revenue pool may be tomorrows dry hole.nThe goal should be to focus on profitable opportunitiesnIndustry should be considered more broadly than traditional definitionnAutomobile industry includes Component manufacture and supply New car assembly and delivery New car warrantee an
9、d service New car financing and insurance Used car sales and serviceTurbulent industriesnProfit pools are especially important and useful in industries undergoing deregulation and/or technological changenSuch changes can open new profit pool opportunities and drain old onesnChoke points may change o
10、r be eliminatednOpportunities for either forward or vertical integration may emergenCurrent vertical integration may be disintermediatedCreating and managing a profit poolnProfit pool analysis may indicate new opportunities or threatsnImperativesnBe open to a new perspective on your business and ind
11、ustrynDeveloping new strategy may require overturning elements of the current strategynBe open to reevaluate the role played by current competitorsnBe vigilant to identify possibility that new entrants may seek to enter your industry with radical strategies Looking Ahead:Profit Pools and the Five Fo
12、rcesnProfit pools are computed by multiplying the size of the revenue by the unit profit marginnEssentially an accounting process-no theorynMost valuable in situations in which external conditions are essential stable and/or unimportantn(Often dominated by internal data alone)nThe five forces tells
13、us(which will study next)nthe underlying determinants that determine both the revenue size and the unit profit marginnThe profit drivers which allow us to forecast the direction of changeMarakon RunnersThomas A.StewartFortuneSept.28,1998Marakon Associatess Approach to Corporate StrategynConsultants
14、to many large corporationsnCoca Cola,HP,GM,CitiCorp,etc.nClients have returns 3.1%higher than industry peer groupnGoal is to increase shareholder value through analysis of economic profitnDeep drilling in business data to measure value creation Product segments Customer segmentsHow Strategy Happensn
15、Learning where value is creatednWaterfall charts by product and customer segmentsnEvaluating strategynIndustry average profit per unitnCompanys profit vs industry averagenManaging valuenCurrent strategynChange product focusnChange customer focusLearning where value is createdProduct segmentsCustomer
16、 segmentsProfit/loss($per unit)Volume(units)Volume(units)0Evaluating StrategyCompany profit per unitIndustry-average profit per unitManaging for valueCurrentstrategyChangeproductfocusChange CustomerfocusValueApplication to our casesnRetail industry(Wal*Mart)nSoft drink industry(Coca-Cola and PepsiCo
17、)nSteel(Nucor)and aluminum cans(CC&S)nHi tech(Intel,Cisco,and Dell)nVideo games(Nintendo)nWeb businesses(eBay and Yahoo!)The Core Competence of the CorporationPrahalad,C.K.and Gary HamelHarvard Business Review,May-June 1990Core CompetencenA Firm is made up of resourcesnpeople,patents,brand names,pla
18、nt&equipment,processes,etcnA competence is the ability to employ diverse skills and resources to perform tasks and activities.nA core competence is a broadly based and/or a broadly applied fundamental capability.Competence and TechnologynCompetence is not the same as technologynCompetence requiresnt
19、echnologiesnsocial organizationncollective learningCore competence questions:nWhat are we really good at?nHow can we build upon it?nWhat do we need to be good at?Characteristics of Effective CompetenciesnDurability:Technical equipment can be short lived.Reputation or knowledge may depreciate more sl
20、owly.nTransparency:The more complex the source of competence,the harder it is to imitate it.nTransferability:The availability of resources to competitors.nReplicability:A competitors internal ability to replicate a competence using available resources.Choosing CompetenciesnHow central is this compet
21、ence to our success in the market?nHow long could we preserve our competitiveness in this business without this particular competence?nWhat future opportunities would be foreclosed if we were to lose this particular competence?Core Competence and Core ProductsEndProducts/ServicesCore ProductsCore Co
22、mpetenceA Hierarchy of CompetenciesSupplemental CapabilitiesEnabling CapabilitiesCore CapabilitiesBuilding Strategy from CapabilitiesStrategyCapabilitiesResources1.Identify resources,appraiserelative strengths and weaknesses.Leverage use of resources2.Identify capabilities.What do we domore effectiv
23、ely than competitors?Identify resource inputs to capabilities.3.Appraise rent-generating potential resources and capabilities in terms of:sustainable advantage,inappropriability4.Select strategy that best exploits the firms resources and capabilities rela-tive to external opportunities.5.Identify re
24、sourcegaps that need to befilled.Invest in replenishing,augmenting,and up-grading the firmsresource base.CompetitiveAdvantageSource:Robert M.Grant,“The Resource-Based Theory of Competitive Advantage,”California Management Review,Spring,1991,page 151.How to map your industrys profit poolOrit Gadiesh
25、and James L.GilbertHarvard Business ReviewMay-June 1998A straight forward exercise with complicationsnConcept is straight forwardnDefine value chain activitiesnDetermine their size and profitabilitynApplication of concept is complicatednFinancial data doesnt correspond to value chain activitiesnComp
26、any data is aggregated across businessesnProducts,customer purchases,channel volumes rarely match up with boundaries of an activitynConsiderable creativity is requiredFour step processnDefine the poolnDetermine the size of the poolnDetermine the distribution of profitsnReconcile the estimatesFour st
27、ep processDefine the poolDetermine the size of the poolDetermine profit distributionReconcile the estimatesTask:determine which value-chain activity influence profits now and in the futureDevelop a baseline estimate of cumulative profits generated by all profit pool activitiesDevelop estimate of the
28、 profits generated by each activityCompare the outputs of steps 2&3GuidelinesTake a broad view of the value chain(beyond traditional industry definition)Seek a rough but accurate estimateShift between aggregation and disaggregation in your analysisIf numbers dont add up,Check assumption and calculat
29、ionsExamine industry from three perspective:own,other players,customersTake easiest route:go where the data areDo own economics first,then large pure players,large mixed,smallerCollect additional dataDont disaggregate more than necessaryTake at least two viewpoints:company level and product levelUse
30、 proxy measures where necessaryResolve inconsistenciesdont ignore themOutputProfit pool listEstimate of total pool profits,(range)Point estimate of profits for each value chain activityFinal estimates of activity and total pool profitsWhat is“profit”anyway?nCan be thought of in three ways(all of whi
31、ch may be relevant for profit pool analysis)nAccounting profitnReturn on investment Economic value added=after-tax operating profits cost of all invested capitalnCash-flow Earnings before taking fixed-asset and capital costs into accountExample:Credit cards at RegionBankAcquisitionFundingServicing$8
32、0 value of a subscriber$279 average annual revenues per subscriber$60 annual payment to servicer per subscriber-$64 cost of acquiring a subscriber-$235 average annual costs per subscriber$50 average annual cost to servicer$16 acquisition profit per subscriber$44 annual funding profit per subscriber$
33、10 annual servicing profit per subscriber$3.20 annual acquisition profit per subscriber amortized over 5 year average lifeX260 million subscribersX260X260$800 million profit$11.4 billion profit$2.6 billion profitRegionBanks Profit Pool Map100%acquisition funding servicingShare of industry revenue20%Operating marginRegionBanks Profit Pool MosaicBanksShare of industry profitsacquisition funding servicingShare of activity profits100%100%BanksBanks
